A. Amendments and Discretionary Consents
7. Increasing Transparency, Accountability, Compliance,
Unless effective enforcement mechanisms and deterrents exist, safe harbor provisions, Section 170(h) Amendment and Discretionary Consent Principles and Procedures, required independent external review processes, and other carefully-crafted rules will not have the desired effect of facilitating proper amendments while discouraging improper amendments, consents, and extinguishments.
At present, the legal risks associated with improper discretionary consents, amendments, and extinguishments fall disproportionately on tax-exempt easement holders. While very few such holders have been disciplined, the sanctions that could potentially be imposed solely on tax-exempt holders are daunting: intermediate sanctions or loss of tax-tax-exempt status. A government holder that agrees to improper discretionary consents, amendments, or extinguishments, by contrast, faces little legal risk. Yet the public value of government-held easements is no less important than the public value of easements held by tax-exempt organizations, and the behavior of government holders holds much the
88 See generally I.R.S. Form 990 (2018), https://www.irs.gov/pub/irs-pdf/f990.pdf.
same level of risk in terms of the public’s perception of conservation easements and the federal incentives for their donation.
Even more anomalously, easement donors and subsequent property owners face little legal risk in seeking or obtaining improper discretionary consents, amendments, or extinguishments after the statute of limitations has run on the deductions. Subsequent property owners face effectively no legal risk. In fact, the low risk of audit means that demanding and obtaining improper discretionary consents, amendments, or extinguish-ments is only faintly discouraged even during the applicable statute of limitations period.89 The fifteen-year carry-forward under the now-permanent enhanced section 170(h) deduction does extend the statute of limitations in some instances.90 But current reporting requirements for amendments and extinguishments (that is, post hoc non-specific reporting on a nonprofit holder’s Form 990), and the lack of any reporting requirements for discretionary consents limits the risk to donors.
Once easement-encumbered property has changed hands, and absent an insider situation, there is no federal legal exposure for the successor landowner from an improper discretionary consent, amendment, or extinguishment, regardless of its impact on the subject property’s conservation or economic value. Accordingly, there is no disincentive for property owners to push, sometimes aggressively, for improper discretionary consents, amendments, and extinguishments. Coupled with holders’ strong motivation to maintain good relations with current landowners, this exposes easements to risk of erosion over time.
The Task Force offers the following options for consideration. They are intended to increase transparency and accountability, facilitate enforcement, distribute risk among all parties (that is, easement holder, original donor, and current landowner), and increase compliance by creating disincentives for property owners to push for, and easement holders to agree to, improper discretionary consents, amendments, or extinguishments. Because the parties sometimes use labels other than
“discretionary consent,” “amendment,” or “extinguishment” to describe these activities, those terms would need to be broadly defined to capture improper activities, regardless of the label used.91
89 See generally Marr & Murray, supra note 41 (discussing low rate of Service audits).
90 See I.R.C. § 170(b)(1)(E)(ii).
91 Discretionary consents could be accomplished by using, for example, temporary use or license agreements, discretionary waivers, or letters of agreement or interpretation.
Amendments could be labeled as, for example, modifications, alterations, transfers,
a. Loss of Eligible Donee Status
To be deductible, a conservation easement must be donated to an
“eligible donee.”92 Pursuant to the Treasury Regulations, to be an eligible donee, “an organization must be a qualified organization, have a commit-ment to protect the conservation purposes of the donation, and have the resources to enforce the restrictions.”93 The regulations further provide that a “conservation group 94 organized or operated primarily or substantially for one of the conservation purposes specified in section 170(h)(4)(A) will be considered to have the commitment required by the preceding sentence,”95 and a “qualified organization need not set aside funds to enforce the restrictions that are the subject of the contribution.”96
Guidance could be issued, perhaps in the form of a Notice, stating the actions or omissions of an organization that can cause loss of “eligible donee” status and, thus, loss of eligibility to accept tax-deductible conservation easement donations. For example, an organization could lose eligible donee status for (1) a material failure to report or material misstatement regarding its conservation easement-related activities on Schedule D of the Form 990 (and the Form 8282, if the recommendation below is adopted), (2) failure to comply with the Section 170(h) Amendment or Discretionary Consent Principles and Procedures, (3) failure to comply with the restriction on transfer requirement of Treasury Regulation section 1.170A-14(c), (4) failure to comply with the extinguishment requirements of Treasury Regulation section 1.170A-14(g)(6), [as modified by the safe harbor De Minimis Release provision (see Appendix B)] and (5) failure to enforce a conservation easement, provided that the holder, consistent with holder’s fiduciary obligation to the public, may (a) decline to take corrective action if the holder determines that the violation does not negatively impact the continued perpetual protection of the property’s conservation values or the conservation purposes of the easement, and the taking of corrective action
releases, or trade-offs. Extinguishments could be referred to as, for example, abandonments, terminations, releases, trade-offs, swaps, substitutions, or reconfigurations.
92 See Treas. Reg. § 1.170A-14(a), (c)(1).
93 Treas. Reg. § 1.170A-14(c)(1).
94 This term is not defined in the Treasury Regulations.
95 Treas. Reg. § 1.170A-14(c)(1).
96 Id.
would not be in the public interest,97 and (b) exercise reasonable discretion in not pursuing or in settling claims when enforcement is not in the public interest, including when the costs of enforcement would greatly outweigh the public benefit to be derived or the damage to conservation values.
Eligible donee status could be suspended temporarily (for example, for a period of three or five years from the date of the Service’s publication of loss of status).98 Notification to the public of the loss of eligible donee status could be provided as a supplement to the Service’s current online list of organizations that have had their federal tax-exempt status revoked.99 Loss of eligible donee status could be permanent for repeat offenders. It should be made clear that loss of eligible donee status has no effect on an entity’s ability to enforce the conservation easements its holds on behalf of the public, although, in the case of a permanent loss of eligible donee status for a repeat offender, mandated transfer of the easements the entity administers to a more responsible holder(s) would be desirable.
The threat of loss of eligible donee status would both deter holders from engaging in the offending actions and assist them in warding off requests from property owners who push, often aggressively, for improper discretionary consents, amendments, and extinguishments.
b. Rescission or Excise Tax
Correction of improper discretionary consents, amendments, or extinguishments by their rescission or, when that is not possible or
97 As an example of this, assume a conservation easement allows the construction and maintenance of a one-story residence on the subject property. The landowner constructs a second story on the residence on the property, and the holder does not discover the violation until construction is completed. The holder may decline to require that the owner remove the second story if the second story has no negative impact on the continued perpetual protection of the conservation values of the property or the conservation purposes of the easement. If the holder wishes to permanently permit the second story, the easement could be amended, provided the amendment satisfies the Section 170(h) Amendment Principles and Procedures, including the prohibition on private benefit. Alternatively, the holder might grant the owner a temporary discretionary consent, assuming satisfaction of the Section 170(h) Discretionary Consent Principles and Procedures.
98 The process for revoking or suspending eligible donee status could be similar to the process for revoking section 501(c)(3) status. The Task Force recommends that there be no retroactive application of loss of eligible donee status, which would be inequitable to taxpayers who made donations without notice of such loss of status.
99 See Tax Exempt Organization Search Bulk Data Downloads: Automatic Revocation of Exemption List, I.R.S., https://www.irs.gov/charities-non-profits/tax-exempt-organization-search-bulk-data-downloads (last visited March 10).
practicable, the landowners’ payment of excise taxes to the Service, could be required. When a discretionary consent, amendment, or extinguishment is found upon later review by the Service to have been improper, the transaction should be unwound or “corrected” to the extent possible.
Ideally, the discretionary consent, amendment, or extinguishment should be rescinded to restore pre-transaction protections to the subject property.100 That may not be possible, practicable, or equitable—for example, because of a transfer in ownership or activities conducted on the property in reliance on the amendment that cannot practically be reversed, particularly without causing additional damage to conservation values. In these situations, the landowner who owned the property at the time of the discretionary consent, amendment, or extinguishment could be required to pay an excise tax to the Service.
The excise tax could be equal to 200% of the increase in the value of the subject property as a result of the improper discretionary consent, amendment, or extinguishment. To increase the deterrent effect and prevent complex evidentiary and valuation disputes, the excise tax should be calculated without deduction or reduction for any consideration that may have been paid to the holder in connection with the discretionary consent, amendment, or extinguishment, whether in cash or in kind. The excise tax should also be calculated without deduction or reduction for any decrease in the subject property’s value caused by other provisions of the discretionary consent, amendment, or extinguishment, or a related transaction, whether or not couched in the form of compensation.101 This corrective model is broadly intended to track the excise tax model applied in cases of private inurement. The monies received by the Service could be used to help defray the costs of an expedited, reduced-fee, advanced-ruling or panel-review process for proposed discretionary consents and amendments.
100 If a holder agreed to a discretionary consent, amendment, or extinguishment that exceeded the discretion granted to the holder in the conservation easement deed, the amendment may be void ab initio under state law, and actions taken by the landowner may constitute violations of the easement enforceable by the holder or the state attorney general on behalf of the public.
101 For example, if an owner and holder improperly agreed to amend a conservation easement to authorize the owner to subdivide and sell two residential lots, which increased the value of the subject property by $200,000, and in exchange (as a “trade-off”), the owner added an additional fifty acres to the easement, the excise tax would be $400,000. This example assumes rescission is not possible.
c. New Intermediate Sanctions
New “intermediate sanctions” could be imposed on the parties to an improper discretionary approval or consent, amendment, or extinguish-ment, similar to the intermediate sanctions imposed on private inurement transactions. While this idea would face resistance in the land trust community, it has the corresponding advantage of providing a useful negotiating tool to a holder faced with a confrontational property owner seeking an improper discretionary approval or consent, amendment, or extinguishment. In addition, the monies received by the Service could be used to help defray the costs of an expedited, reduced-fee, advanced-ruling or panel-review process for proposed discretionary consents and amendments.
d. Enhanced Reporting
(1) Enhanced Form 990 Reporting
A charitable organization filing Service Form 990 is currently required to report on Schedule D the total number of easements held by the organization that were transferred, modified, or extinguished during the tax year, and to provide an explanation of these activities.102 This reporting requirement in its current form is less than ideal. First, not all entities holding tax-deductible easements are required to file Form 990 (government entities are exempt, as are holders that do not meet the Form 990 thresholds). Second, some organizations leave the easement-related questions on the Form 990 blank, others report transfers, amendments, and extinguishments without providing any explanation, and others include opaque explanations. Third, the Instructions to Schedule D do not currently require that charitable organizations report on the discretionary consents they have granted during a taxable year, and these consents are sometimes used to authorize activities on protected properties without formally amending easements, thus avoiding the amendment reporting requirements. Thus, the Form 990 in its current form does not provide a true or particularly useful picture of the modifications being made to these perpetual gifts over time.
The Task Force recommends that charitable organizations holding conservation easements that do not meet the Form 990 filing thresholds and government holders be required to report on their conservation easement-related activities in the same manner as charitable organizations
102 See I.R.S. Form 990 Schedule D (2018), https://www.irs.gov/pub/irs-pdf/
f990sd.pdf.
that file the Form 990. The Task Force recommends that the Form 990 Schedule D instructions be modified to require reporting on discretionary consents or similar techniques, in addition to transfers, amendments, and extinguishments (as those terms are defined herein). The Task Force recommends that the instructions be clarified to ensure more straight-forward, accurate, and comprehensive reporting on these activities.103 For example, to the extent that the recommended Section 170(h) Amendment and Discretionary Consent Principles and Procedures are adopted, including the requirement that a holder document in writing satisfaction of those Principles and Procedures, that written documentation could be attached to Schedule D. Finally, consideration could be given to requiring holders to make certain declarations or acknowledgments regarding their conservation easement-related activities, similar to those required of appraisers and donors on the Form 8283.
The Task Force believes these changes would help to ensure that the reporting requirements both serve as a more effective deterrent to improper discretionary consents, amendments, and extinguishments, and provide the Service, state regulators, researchers, and the public with a better picture of the manner in which charitable organizations and government entities are administering these perpetual gifts on behalf of the public. The changes also would assist holders in warding off requests from property owners who push for improper discretionary consents, amendments, and extinguishments.
(2) Enhanced Form 8282 Reporting
The requirements for filing a Form 8282 could be modified to extend beyond transfers of conservation easements themselves and include amendments and extinguishments with regard to donated or partly-donated conservation easements.104 No other form of property donation is as readily susceptible to a change in its terms as a conservation easement.
Moreover, because amendments and extinguishments can be tantamount to the sale, exchange, or other disposition of property rights that were donated, Form 8282 reporting is appropriate. To the extent that a Form
103 The definition of a conservation easement in the Instructions to Schedule D could be clarified to refer to only conservation easements for which a section 170(h) deduction or other federal tax benefit was claimed (i.e., full donations or bargain sales of easements).
104 Discretionary consents are not included in this recommendation because, if the Section 170(h) Discretionary Consent Principles and Procedures are adopted, such consents could be granted only in limited circumstances.
8282 filing might prompt a review of the original donor’s deduction, this taxpayer- and project-specific reporting would create a disincentive for the original donor to pursue a questionable amendment or extinguishment.105
The logical extension of other Task Force recommendations might suggest that the Form 8282 filing requirement should apply only to extinguishments and amendments that require independent external review. A lower number of Form 8282 filings could make Service review and action, where appropriate, more likely and feasible. That said, a blanket requirement may be simpler to apply and would be consistent with current Form 990 Schedule D reporting requirements.
Given the perpetual life of a conservation easement and the fact that many amendments are requested and agreed to many years after an easement’s donation, this recommendation, which would require the filing of Form 8282 only if amendments or extinguishments are executed within three years of the easement’s donation, would have a very limited salutary effect.106 In addition, while there is value in transparency and advising the Service of the identity of landowners who benefit from amendments and extinguishments, until there is more certainty regarding proper and improper amendments, taxpayer-specific reporting might discourage conservation-enhancing as well as conservation-weakening or -negating amendments.
e. Increased Collaboration Between the Service and State Charity Regulators
Discretionary consents, amendments, and extinguishments present issues for both the Service and state regulatory authorities. While not a sanction per se, enhanced communication would facilitate the Service being able to take appropriate action when warranted by an action taken by a State Charity Regulator, and vice versa. At a minimum, holders could be required to provide a copy of Part II (Conservation Easements) of Schedule D of the Form 990, along with the accompanying explanations in Part XIII, to the State Charity Regulator. This requirement would be
105 Some inequities are possible if the original donor transfers the subject property, and the current landowner then obtains an improper discretionary consent, amendment, or extinguishment.
106 See I.R.S. Form 8282, General Instructions (Rev. Apr. 2009), https://www.irs.
gov/pub/irs-pdf/f8282.pdf. Consideration might be given to extending the time period in which a Form 8282 is required to be filed with respect to conservation easement amendments or extinguishments, particularly given the enhanced carry-forward period for the section 170(h) deduction, or requiring this type of reporting on some other form.
similar to the requirement applicable to private foundations, which must furnish copies of Form 990-PF to state officials.
f. Government Holders
Because the public value of government-held easements is no less important than the public value of easements held by charitable organizations, the Task Force recommends that reforms be applied to all qualified organizations, including government entities, to the extent possible. For example, to retain their status as “eligible donees” of tax-deductible easements, government entities could be required to annually report to the Service on their discretionary consent, transfer, amendment, and extinguishment activities, similar to the reporting that is required by charitable organizations on the Service Form 990. They also could be subject to the other rules regarding loss of eligible donee status recommended above.